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China: What Deflation Looks Like

Why the 32% slide in the Shanghai Composite is more than just a "hiccup"

By Elliott Wave International

The Shanghai Composite fell another 8% at the open on Wednesday (July 8). Trading was soon halted by the authorities. (But for a different reason that the trading halt on the NYSE the same day.)

From its all-time high on June 12, China's main stock index is down 32%. Using the word "crash" is becoming appropriate.

"At the moment there is a mood of panic in the market and a large increase in irrational dumping of shares, causing a strain of liquidity in the stock market," said China's Securities Regulatory Commission on Wednesday (bold added).

But the "dumping of shares" is not the only type of selling that's going on in China right now. Bloomberg reports that (bold added),

"China's stock rout spread to the country's commodities markets as investors rushed to raise cash. Everything from silver to sugar to eggs tumbled with the Shanghai Composite Index, which crashed to a three-month low on Wednesday. 'People are selling everything in sight to get their hands on cash.'

'Agricultural products in my view are collateral damage in this selloff," said [one] fund manager...'Pigs are still going to eat, so what does this stock market stampede have to do with soybean meal?'"

Good question. But if you remember the darkest days of the 2008 financial panic and the now proverbial "liquidity crunch," the situation in China should sound remarkably familiar.

Familiar, because when everything falls in price, it's called deflation. We in the U.S. had a strong brush with it in 2007-2009, Europe has been struggling with deflation over the past couple of years -- and now, it seems, China has caught deflation bug, too.

Here's how our recent Short Term Update put it:

"The financial media seemed to breathe a sigh of relief that stocks were not down more from the results of Greece's referendum. But these stories miss the entire point of what's transpiring, in our opinion. Greece's default is not the cause of the current financial malady but the result of a trend toward an increasingly pessimistic social mood.

"The negative mood trend will eventually manifest throughout financial markets and in culture more generally. Greece, Puerto Rico, China and a variety of 'risk' assets that are declining are just the first step in a broader and longer trend toward economic and financial contraction."

Our current Elliott Wave Financial Forecast adds:

"As Bloomberg summed it up, 'when you can't sell what you want, then be prepared to sell what you can.' There is a lot of indiscriminate selling to come."

This article was syndicated by Elliott Wave International and was originally published under the headline China: What Deflation Looks Like. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.